Dynamic Effects of the EU Carbon Border Adjustment Mechanism and the U.S. Tariffs on Structural Transformation and Climate Outcomes

Trade policies are becoming increasingly persistent and play an important role in shaping global production, trade, and emissions patterns. Because such policies affect economic agents’ expectations about future market conditions, their impacts may extend beyond contemporaneous trade reallocation through capital accumulation and climate–economy feedback. This paper develops a forward-looking integrated assessment framework that incorporates sector-level bilateral trade to evaluate the dynamic effects of U.S. tariffs and the European Union’s Carbon Border Adjustment Mechanism (CBAM). The results show that endogenous capital accumulation substantially amplifies the effects of trade policies on welfare, emissions, and employment. U.S. tariffs primarily redistribute welfare toward the United States while having little effect on global emissions. In contrast, CBAM generates larger emissions reductions but concentrates both welfare losses and emissions-reduction burdens in developing and transition economies. We also find significant dynamic employment adjustments, with substantial differences between short-run and long-run responses across regions and sectors.